DirecTV May End Up in Malone’s Hands

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News Corp. chairman Rupert Murdoch’s two-year effort to get Liberty Media Corp. chairman John Malone off his back could be heading for a resolution. But it may cost him his controlling stake in direct-broadcast satellite giant DirecTV Group Inc.

The latest twist in the two-year negotiations to buy back Malone’s 19% voting interest in News Corp. stock — only the Murdoch family has a bigger stake — could involve Liberty taking hold of News Corp.’s 38% controlling interest in DirecTV in exchange for the Liberty Media holding, according to televised and print reports last week.

Liberty, News Corp. and DirecTV officials all declined to comment.

Comments made by Liberty CEO Greg Maffei last Thursday at the Merrill Lynch Media & Entertainment conference in Pasadena, Calif. appeared to trigger speculation of a DirecTV deal.

Asked at the conference what Liberty was doing to unwind the News stake, Maffei mentioned several options, including gaining control of DirecTV.

“What we will end up with at News Corp., I don’t know,” Maffei said, adding later that DirecTV was one of several News Corp. assets the company is looking at.

“That range [of assets] really is dependent upon, can you find some operating asset you think you want to own for the long term that is synergistic potentially with some of the things we might end up with and that is attractive, and that Rupert would want to sell and that we could agree on price on? That’s why this isn’t done yet and that’s why it may never get done,” he said.

MILESTONES AHEAD

But Maffei added that there are certain milestones on the horizon that may spur News Corp. to do a deal: the scheduled Oct. 20 vote on its poison pill — which would prevent Liberty or any other individual from owning more than a 15% voting stake in the company — and the expected May 2007 change in the tax rules for cash-rich split-offs, which would increase the operating asset requirement for such deals to 65% from its current 25% requirement.

Malone and Murdoch have been trying to work out a deal ever since Liberty accumulated its voting stake in December 2004. Holding up a resolution is the desire to make the transaction tax-free through a cash-rich split-off. Structured correctly, such a deal minimizes the tax implications for both parties.

This is the third asset that has been speculated as fodder for a News Corp.-Liberty deal. In early 2005, News considered swapping its interest in the National Geographic Channel cable network, but that was nixed by its co-owner, the National Geographic Society. Later last year, 10 News-owned smaller-market television stations looked like they would be exchanged for Liberty’s $11 billion News Corp. stake.

The possibility of a DirecTV swap was first reported by CNBC.

A possible wrench for the DirecTV deal: News Corp. has only owned its controlling interest in DirecTV (valued at about $9 billion) for three years, short of the five years required for such transactions. That means that News Corp. would have to contribute another operating asset — possibly some small-market TV stations — as well as a large chunk of cash, according to Wall Street analysts.

If Liberty did gain control of DirecTV, a deal to join with No. 2 DBS service provider EchoStar Communications Corp. could be a next step for Malone.

“You would think that some of the regulatory issues would be less onerous if you did try to do a merger with the two because you wouldn’t have content assets entangled,” said Janco Partners cable and satellite analyst Matt Harrigan. “Maybe the wild card there would appeal to Malone.”

Malone has long been interested in gaining a foothold in the U.S. satellite-TV business. He helped create the PrimeStar satellite television service in the early 1990s, later selling it to DirecTV. He also considered making a bid for DirecTV in 2003, ceding to News Corp. to avoid a bidding war.

Murdoch acquired the controlling interest in DirecTV Group from General Motors Corp. in 2003, for about $6.6 billion, culminating a years-long quest for a satellite play in the United States. Murdoch, who already dominates satellite television in the United Kingdom (with British Sky Broadcasting plc), Asia (with Star TV) and Italy (with Sky Italia) had been lusting for a distribution foothold in the U.S since its aborted attempt to purchase EchoStar in 1997.

While DirecTV has been a good vehicle for launching new channels — as noted by News Corp. chief operating officer Peter Chernin at the Merrill Lynch conference last week — owning a U.S. distribution platform in the U.S. may not be as essential as it once was for News. Couple that with dwindling subscriber growth — basic net additions were 125,000 in the second quarter, down from 225,000 a year ago — the inability to create a broadband strategy and looming competition from the telcos, and Murdoch may believe that it is time to sell.

“I don’t think Fox on the content side really needs DirecTV to ensure the distribution of content,” Harrigan said. “It’s nice to have when you do negotiations, but I think it’s a mild tactical positive as opposed to anything that’s transformative.”

Any hopes to turn DirecTV into a juggernaut like Murdoch’s British Sky Broadcasting plc service overseas have likely been dashed, Leichtman Research Group president and principal analyst Bruce Leichtman said.

“What worked in England, what worked in Japan, does not necessarily work in the U.S. He’s coming in at a completely different phase of the multichannel-video industry here,” Leichtman said. “You’re now at a point where the market is saturated.”

AUCTION INACTION

Another indication of Murdoch’s displeasure with DirecTV could be the satellite giant’s early exit from the Federal Communications Commission wireless-spectrum auctions. Teaming up with EchoStar, the two DBS powerhouses were expected to be aggressive bidders for the spectrum, which many believed would be the foundation for a high-speed data product. But the two dropped out of the auction in the 16th round — the auction recently entered its 118th round, and is ongoing — without winning any markets.

On the Liberty side, unwinding the News Corp. stake is in keeping with its strategy to monetize the myriad interests it has in publicly traded media and technology assets. Liberty’s main operating asset is its 100% interest in premium cable programmer Starz LLC.

Upon hiring former Oracle Corp. and Microsoft Corp. chief financial officer Maffei as CEO last year, Malone has charged him with turning those public stakes into operating assets.

While Maffei has made some deals — he recently swapped Liberty’s interest in telecom service provider IDT Telecom for its television, animation and live-action film-production arm, IDT Entertainment — he still has a long way to go.

Aside from the News Corp. stake, Liberty also owns 4% of Time Warner Inc. stock, valued at about $3.1 billion. Earlier this year, there was speculation that Liberty would gain control of Time Warner Inc.’s Major League Baseball team the Atlanta Braves, in return for that interest (valued at about $450 million) and cash.

Liberty also owns a 1.5% stake in CBS Corp., 1.5% of Viacom Inc., 3% of Motorola Inc., a 4% interest in Sprint Nextel Corp., 3% of Embarq Corp. (Sprint’s former local telephone division), 2% of Freescale Semiconductor and 1% of Priceline.com. Whether Liberty would be able to monetize those small interests for an operating asset remains to be seen.

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